For contractors, builders, and construction company owners, bankruptcy is often more complicated than it is for other businesses because construction companies typically have ongoing projects, subcontractor obligations, retainage, bonding requirements, mechanics lien issues, equipment loans, and personal guarantees.
If you operate a construction business and are considering bankruptcy, the most important thing to understand is that the decisions you make before filing can have a major impact on your personal liability, future licensing, and the amount creditors ultimately recover.
Construction Companies Often Have More Than Just Business Debt
Many construction owners assume bankruptcy is only about loans and credit cards. In reality, construction businesses frequently have obligations that require special attention, including:
- Equipment financing and vehicle loans
- Material supplier balances
- Lines of credit
- SBA loans
- Bond claims
- Subcontractor disputes
- Mechanics lien claims
- Payroll tax liabilities
- Personal guarantees signed by owners
Before any bankruptcy filing, it is critical to identify which debts belong solely to the company and which debts could become personal obligations.
Personal Guarantees Can Create Personal Exposure
Many contractors personally guarantee equipment loans, supplier credit accounts, SBA loans, lines of credit, and commercial leases. When a construction company can no longer pay its obligations, lenders often look to the owner personally for repayment.
A company closure does not automatically eliminate personal liability. In many situations, owners must evaluate whether a personal bankruptcy filing should accompany a business wind down/business bankruptcy.
Ongoing Projects Create Unique Challenges
Unlike many businesses that can simply close their doors, construction companies often have projects underway when financial problems arise.
An unfinished project can create contract disputes, payment issues, and potential claims from customers, subcontractors, and suppliers. In some situations, completing a project may reduce losses and preserve value. In others, continuing to operate may only increase the company's financial problems.
Each project should be evaluated individually before making decisions about closure or bankruptcy.
Mechanics Liens and Construction Claims Require Careful Review
Construction creditors often have stronger collection rights than ordinary unsecured creditors.
Subcontractors, suppliers, and laborers may have mechanics lien rights, stop payment rights, or bond claim rights. These claims can complicate both bankruptcy cases and out-of-court wind downs.
Before filing, owners should have a clear understanding of outstanding lien claims, retainage obligations, pending disputes, and any potential claims that may not yet have been asserted.
Payroll Taxes Are a Major Concern
One of the biggest mistakes struggling construction companies make is using payroll tax funds to stay afloat.
Federal payroll taxes and certain state tax obligations can create personal liability for owners, officers, and responsible persons.
Construction companies experiencing cash flow problems should prioritize understanding:
- Payroll tax exposure
- Sales tax obligations
- Employment tax compliance
- Trust fund tax liabilities
These debts are treated differently from ordinary business debt and will survive a bankruptcy filing, even imposing personal liability on the owners of the business.
California-Specific Considerations
Contractors operating in California face several additional issues that should be reviewed before filing bankruptcy. First, depending on where the business is located the strategy needs to be tailored to the local court jurisdiction. Why? because the results could differ if the case is filed in the Northern District of California versus the Eastern District of California. In addition, California has its own set of exemptions that will factor into the analysis, especially if the personal assets of the owner are at risk.
For many construction company owners, the most important question is not whether bankruptcy is available. The real question is whether the business should reorganize, wind down outside of court, file Chapter 11, file Chapter 7, or whether the owner should consider a personal bankruptcy as part of the overall strategy.
The answer often determines whether the owner can move forward with a manageable financial recovery or face years of collection efforts after the business closes.
Our business bankruptcy practice helps businesses with all of their debt and insolvency needs in Chapters 7 and 11. David is a certified specialist in bankruptcy law and has a background in finance and accounting. The combination of those disciplines gives him the ability to comprehensively evaluate complex business situations to determine if bankruptcy is the best solution, and if so, recommend what type would best pertain to the situation. David@AriettaLaw.com - (925) 472-8000